From Dirigisme to Realism: Chinese Industrial Policy in the Era of Globalisation Jean-François Huchet To cite this version: Jean-François Huchet. From Dirigisme to Realism: Chinese Industrial Policy in the Era of Globalisa- tion. Xavier Richet, Violène Delteil, Patrick Dieuaide. Strategies of Multinational Corporations and Social Regulations, Springer-Verlag, pp.57-76, 2014, 978-3-642-41368-1. 10.1007/978-3-642-41369- 8_4. hal-01325264 HAL Id: hal-01325264 https://hal-inalco.archives-ouvertes.fr/hal-01325264 Submitted on 2 Jun 2016 HAL is a multi-disciplinary open access L’archive ouverte pluridisciplinaire HAL, est archive for the deposit and dissemination of sci- destinée au dépôt et à la diffusion de documents entific research documents, whether they are pub- scientifiques de niveau recherche, publiés ou non, lished or not. The documents may come from émanant des établissements d’enseignement et de teaching and research institutions in France or recherche français ou étrangers, des laboratoires abroad, or from public or private research centers. publics ou privés. From Dirigisme to Realism: Chinese Industrial Policy in the Era of Globalisation Jean-François Huchet Professor, INALCO-Langues'O, Sorbonne Paris Cité The 2012 "Fortune 500" classification of the world’s largest companies includes 73 Chinese firms (32 for France and 68 for Japan), whereas there were none only 15 years ago.1 Meanwhile, Chinese firms are increasing their overseas operations with nearly $60 billion of foreign direct investment per year, on average since 2008, compared to less than $1 billion annually before 2000. Fifteen years ago, Chinese exports were mainly composed of primary products and goods with a low technological content. Today they are rapidly concentrating on products in the information industry. Research and development (R & D), which was totally lifeless in the early 1980s, has also experienced brisk development since the late 1990s: China is now the world's second largest publisher in scientific journals and ninth in the number of patents filed in the United States in 2009.2 These signs of the emergence of China's industrial power raise a number of questions in the fields of economics and industrial policy, as well as in growth theory (Huchet, 2010). After the Japanese and Korean miracles, the temptation is indeed very strong to apply to China – the civilisation at the origin of the Confucian political and cultural basis of Asia – explanations related to the omnipotence of the State and the effectiveness of industrial policy (Johnson, 1982). What is really the truth? Has China followed the virtuous industrial policy footsteps of its Asian neighbours? What have been the terms of the industrial policy since 1978 and what effect has it had on China’s economic takeoff? What directions might industrial policy take in the coming years, given the context of the increasing openness of China’s economy? This paper aims to provide some answers to these questions. Section 1 recalls some aspects of the historical legacy of the period before 1978, as well as some features of the first steps to economic reform in the late 1970s and early 1980s. These had a major influence on the objectives, the strategy and the efficiency of Chinese industrial policy. The second section presents the main outlines of China’s industrial policy until the late 1990s, focusing primarily on the policy of creating "national champions", and the rationalisation of industrial structures, as well as on the development of the technological capabilities of firms. Industrial policy during this period was often characterised by excessive ambitions, given the mode of socialist institutions and businesses, along with the chronic underdevelopment of human and financial resources that plagued China until the mid-1990s. Policies launched during this period were largely imbued with socialist planning. They led to mixed results depending on the sector, but were often disappointing in terms of objectives. Other elements of the reform policy during this period which were not, strictly speaking, industrial policy, did in fact help transform corporate behaviour and the functioning of institutions, to increase the financial and human resources available. Finally, Section 3 looks at the transition from dirigisme to realism in the second half of the 1990s. This development 1 http://money.cnn.com/magazines/fortune/global500/2012/countries/China.html?iid=smlrr, consulted 31 August 2012. 2 Royal Society, Knowledge, Networks and Nations: Global scientific collaboration in the 21st century, Royal Society Policy document, March 2011, 114 pp. 1 occurred within an economic context that was generally much more favourable than in the 1980s. The improved tax situation allowed the Chinese government to have the financial means to launch credible and ambitious industrial policies. Institutions, including ministries, commissions, and agencies were restructured, while the vestiges of planning were cleared away. The State industrial sector was also significantly restructured, through privatisations, mergers, layoffs and employment along with social protection reforms which shattered the "iron rice bowl" that the socialist leaders had not dared to attack in the 1980s.3 Finally, the massive investments made in the 1990s in the educational system of large cities and in infrastructure also contributed to improving the design and conduct of industrial policy. The less proactive industrial policy of the 2000s also diversified, both in terms of means and targets, aiming to provide support to the private sector and small- and medium-sized enterprises (SMEs). These businesses had been totally ignored during the first period. 1 - The Historical Legacy of Industrial Policy Despite the profound break in the economic development strategy that occurred when Deng Xiaoping seized power in December 1978, Chinese policy-makers remained firmly focussed into the mid-1990s on a vision of industrial development policy that was inward and planned. It is useful to recall some historical facts and aspects of the early stages of economic reform, which had a major influence on the content and evolution of Chinese industrial policy during the 1980s and 1990s. 1.1 The weight of History Generally speaking, China's industrial policy has been influenced by four major events in the history of modern and contemporary China: • A sense of humiliation and theft of its rank as a great millennial power in the face of Europe, the United States, and Japan which all forced China to sign unequal treaties. This has led to a strong will to find a prominent place on the world stage. • The observation made in the late 1970s by Chinese leaders of its growing economic and technological backwardness with respect to China’s Asian neighbours. Economic success is analysed as the result of proactive action by the State, within a capitalist system. • A deeply rooted belief in the omnipotence of the State and its capacity to intervene following the combined influence of the "celestial bureaucracy" of imperial China and the assimilation of the Soviet planning model. • Management of the policy favouring population growth promoted by Mao Zedong in the late 1950s. Despite a slowdown in the birth rate in the early 1970s, this policy resulted in a doubling of the population between 1958 and 1980 (when China's population exceeded one billion individuals) and the influx of young people (near 15 million per year) on the labour market in the late 1970s. The spectre of widespread unemployment that could undermine social stability and thus the communist regime has strongly guided the choice of the Chinese leadership, both at central and local levels. The communist State adopted a laissez-faire approach and tolerance for the proliferation of public and private companies which are under- capitalised and poorly innovative, but able to absorb this huge "industrial reserve army". 3 The “iron rice bowl” refers to a system of lifetime employment, free housing and basic social protection which prevailed in State enterprises and municipalities. 2 These four major factors in the history of modern and contemporary China have strongly conditioned the ambitions, the nature, objectives and results of the industrial policy pursued by the State over the last thirty years. 1.2 The Maoist legacy China took a great step in 1978 in terms of re-designing its industrial development strategy. Few countries, even in the communist camp, had been so cut off from the rest of the world, having experienced political movements such as the "Great Leap Forward" (1958-1961) and the Cultural Revolution (1966-1976), which were devastating to its economic organisation. The industrial development strategy in the Maoist era was based on an essentially functionalist view of the economic system. Unlike the Soviet model, which favoured large production units, China’s strategy was also concerned with local autonomy in production. Each government department had its own companies, each province, even each municipality had to adopt as complete a production system as possible. The period during which so-called "Third Front" companies were set up in interior provinces (1964 and 1973) only reinforced this dispersion phenomenon and the duplication of investments. Political movements orchestrated by Mao's Great Leap Forward and the Cultural Revolution deeply destabilised the Soviet-style system of central planning China introduced between 1953 and 1958. The implementation of such Soviet planning was stopped at the institutional level between 1958 and 1978: no five-year plan reached its objectives during this period (Riskin, 1987). In 1990, just months after the Berlin Wall had fallen, 52,000 products were still being managed by central planning in Moscow, at the USSR’s Gosplan. In China, in 1978, only 700 products were managed centrally, by the State Planning Commission in Beijing (Naughton, 1995). The Maoist strategy led to a prioritisation of industry subject to the planning level of production. Production units existed that were directly supervised by central government (Zhongyang shu), while other units were dependent on provincial or municipal governments (Difang shu).